Although increasing access to higher education has been a priority of the federal government for more than half a century, the government has largely shifted the way in which it offers assistance over the last two decades from grants to loans. In the aftermath of the dot-com and mortgage debt bubbles, skyrocketing student loan debt levels and default rates are creating public anxiety over the possibility of a student loan debt bubble. This article examines the tax deduction for student loan interest against the backdrop of these recent developments.

The deduction of interest generated on student loan indebtedness was eliminated in 1986 and revived almost a decade later through Section 221 of the Internal Revenue Code. Objective analysis of the provision suggests that it is a paradigm of inefficiency in its failure to increase access to education or meaningfully assist borrowers with the management of their student loan debt. Worse still, the deduction seems to function most efficiently as the capitalization of a cultural expectation. Interest generated by student loan debt, along with mortgage debt, are presently the only types of personal interest receiving favored treatment through the tax code. In the aftermath of the dot-com and mortgage debt bubbles, and facing the possibility of a student loan debt bubble, this article examines mistakes that have arguably been made by and through the mortgage interest deduction and asserts that the role of Section 221 in underscoring norms needs to be examined and adjusted.

National policy that generally encourages higher education must be refined and narrowed to instead encourage responsible borrowing for higher education and repayment of any underlying indebtedness. As it may be unavoidable that social and cultural expectations will be capitalized through the tax code, a realistic way to capitalize the correct expectation is proposed: the repeal of the student loan interest deduction in favor of an alternative provision that works cohesively with the income-based repayment plans implemented in 2007 and 2011.

Comments

I don't even qualify for this deduction anymore, but /facepalm.

Posted by: No, breh. | May 14, 2014 10:41:48 AM

So, because society encourages students to go to college, which often times comes at significant cost, the student must be the one punished for a decision they made at age 17 or 18 usually on the advice of teachers, counselors, and parents? Sure we may need to reform the federal/private student loan industry and in general the way college is approached, but financially injuring the student as the opening solution is incredibly idiotic.

As one whose student loans are greater than my mortgage, I do not even get the luxury of the few extra dollars in tax savings that the deduction brings. I think the deduction is but one small remediation to those of us who incurred significant debt after being encouraged to do so by professors, practicing attorneys, and family members. I cannot think of one classmate of mine that ever said, " I would not have gone to law school, but the student loan interest deduction make it too attractive."

Posted by: Daniel | May 15, 2014 6:21:46 AM

@Daniel,

Just wait until they retroactively repeal PSLF and PAYE, the prospect of which has many Republicans salivating... Other quarters want to eliminate GradPLUS loans, which sounds great at first - grad schools won't be able to charge as much! - until you see that the funding for this initiative comes from the student lending industry, which no doubt wants to revive the pre-2006/07 days of law students and others having a $20.5k/year Stafford cap and having to borrow another $40k/year in private loans to make ends meet. Did I mention that the biggest private lender to law students back in the day - AccessGroup - is actually jointly owned by all of the accredited law schools as a membership organization? We are far from seeing the worst of this mess yet.

Posted by: Unemployed Northeastern | May 15, 2014 8:40:05 AM

Could there be a more tone deaf proposal than eliminating the student loan interest deduction? It's already capped at 2500, and the majority of graduates, especially those of law schools pay substantially more in interest than that. Moreover, there is a (low) income ceiling at which point the 2500 deductibility becomes phased out. I actually paid mine off this year (took me 6 years) and had many years where I ended up paying a lot more in interest than I was able to take advantage of.

While part of educational financing reform involves more responsible borrowing, price-sensitivity, and cost-controls, eliminating one of the very few helpful tools that allow ACTUAL repayment is a step in the wrong direction.